One of the many financial changes which is being proposed by the Government is the realignment of the various inflation figures – specifically, the Retail Price Index and the Consumer Price Index. Here Maunder Taylor, who offer lease renewals advice in and around London, explain the various abbreviations, and outline why these changes could have a number of implications for the property market.
The Retail Price Index
The RPI was first introduced in 1956 by the UK government and was originally used as the official measure of inflation. It takes a representative sample or basket of goods and measures how much the prices have gone up or down.
The goods in the basket change annually, so in more recent times they have included mobile phone contracts and online gaming & video streaming subscriptions. However, foodstuffs (pictured) remain among the core ingredients. The RPI also includes housing costs (which can be in the form of rents or mortgage interest payments).
It is still used as a measurement metric for the prices of various products and services such as fuel, tobacco, road and council tax, train tickets and final salary pension schemes. So, when the prices of these products go up ‘in line with inflation’, the RPI is the metric that is being used.
Some property agreements, such as rent reviews, also use it as an indexation measure (where the rent rise is ‘pegged’ to the RPI). However, some stakeholders insist on a cap (a maximum increase) or a collar (a minimum rise).
The Consumer Price Index and the CPIH
This is known as the CPI and differs from the RPI in that it doesn’t include housing costs. This means it is commonly a lower figure than the RPI, as the latter can be distorted by rapid house price rises and mortgage rates. The CPI does still use a basket of goods and services like the RPI.
CPI is still used as the inflation metric when it comes to calculating income tax thresholds and allowances, State and public sector pensions, Universal Credit, Housing Benefit and statutory sick pay.
There is also an additional metric known as CPIH, which does include owner occupiers’ housing costs. This includes council tax, and something called ‘rental equivalence’ which measures how much a house owner would pay for an equivalent rental property.
What Changes are Being Made – and Why It Matters to Property Owners
The Government has announced that, from 2030, the RPI figure will be more closely aligned with the CPI figure. The changes could have an impact on property values by as much as 8% – for more details check out our previous blog here; in future landlords may prefer a rent review based on the open market value rather than the RPI.
Property investors should realise that the change may mean they will get a lower rate of return on their outlay if it any tenancy agreement uses this new metric, as the CPIH generally produces a lower percentage figure than the RPI. However, tenants may be in a stronger position as renting rates may decrease (and this includes both domestic and commercial leaseholders).
What You Should Do
If you are likely to be investing in property (or renting it) before 2030, then this is an issue you should be considering at least 15 months ahead of the lease’s expiry date, that the change is due to come in in six years’ time (and your lease may last well into that period).
The important thing is for landlords and tenants to communicate with each other about any changes in the rent levels, and which (if any) inflation metric is being used. We would always recommend an open and honest discussion between the various parties, rather than a stalemate which could result in a lengthy and costly legal dispute.
Independent estate agents Maunder Taylor, who are based in Whetstone, offer lease renewals advice for investors, landlords and tenants in London and Hertfordshire – for more details click here. You can also contact Ross Maunder Taylor or call us on 020 8492 5526.